Debunking the Myth of the Oil Crisis

The opening years of the 21st century are marked by milestones in the world of oil: the war in Iraq, the Shell reserves downgrade, Hurricane Katrina, and the breaking of the once unthinkable $100 per barrel barrier. Many have seized on these events as evidence that we are crossing the threshold of 'peak oil'. Behind us, a century and a half of abundant, cheap oil that fuelled industrial civilization and brought unparalleled prosperity to a fortunate global minority. Ahead of us, permanent declines in oil production, scarce and unaffordable energy, wars over dwindling resources, disastrous climate change, perhaps the collapse of modern society. But these ideas are based on misconceptions, flawed reasoning, and excessive pessimism. The world has abundant oil and gas for decades to come, geopolitical conflicts can be avoided by adroit policies, and we can learn to use hydrocarbons without unacceptable environmental damage.

We have been here before. In 1865, the economist William Jevons warned that Britain’s global supremacy would shortly be ended by the exhaustion of its coal mines. The pioneering conservationist Gifford Pinchot wrote in 1910 that "our supplies of iron ore, mineral oil and natural gas are being rapidly depleted, and many of the great fields are already exhausted". There were further predictions of imminent oil decline from industry geologists in 1885, 1919 and 1956, from Jimmy Carter in 1977, from the US government in 1980. A prominent 'peak oiler', Colin Campbell, claimed in 1989 that oil output had peaked; another, Kenneth Deffeyes, put the peak date, rather precisely, at December 16th 2005.

The current high prices certainly seem to give some credibility to the idea that we are approaching some fundamental limit of oil resources. But we should remember how we arrived at this situation, since the culprit is not constraints on oil in the ground: it is the long 1986-98 period of low prices and under-investment. Low prices decimated the oil industry, while the rise of energy-hungry new powers in Asia, combined with robust demand in the developed world and geopolitical upsets in major producers, stealthily ate up spare production capacity. The inevitable result, perhaps amplified by ‘speculation’ and market nervousness, has been a so-far inexorable rise in the oil price.

This price rise is not driven, then, primarily by geology. But many commentators outside the energy business, and some within it, believe high oil prices vindicate their often-repeated claims that 'peak oil' is imminent. Supporters of this view point to the work of the American geologist M. King Hubbert, whose seminal 1956 paper prophesied a peak in US output by 1965-1970 (the actual year was 1970), a success often taken to prove that oil depletion must follow 'Hubbert's Curve'. Yet when applied to other countries, 'Hubbert's Curve' and its variants are at best approximately right, but frequently wildly wrong.

Predictions of the date of 'peak oil' require some estimate of the amount of oil reserves known today, and the quantity to be found in the future. Believers in imminent depletion state that global reserves, particularly in the OPEC countries, are heavily over-stated, that exploration success is falling well short of replacing production, and that technology does not unlock significant new oil. These assumptions imply that we are on the cusp of producing half of our ultimate total of oil. Hubbert’s method therefore predicts imminent decline.